Fed Cites Stable NAV, Bond Funds as Concerns

The Federal Reserve Board’s most recent semi-annual Monetary Policy Report raises old concerns relating to prime money market funds, bond mutual funds, and bond ETFs in one paragraph of a 60-page report. While new SEC rules requiring certain money market funds to adopt a floating NAV will not take effect until October 2016, the report indicates that the Fed still views stable NAVs as a risk in the interim. The report notes that, while “[r]eliance on wholesale short-term funding by nonbank financial institutions has declined significantly in recent years and is low by historical standards . . . prime money market funds with a fixed net asset value remain vulnerable to investor runs if there is a fall in the market value of their assets.”

The report also raises concerns that bond mutual funds and ETFs “now hold a much higher fraction of the available stock of relatively less liquid assets—such as high-yield corporate debt, bank loans, and international debt—than they did before the financial crisis.” The Fed argues that this concentration increases the risk of a forced sale in the bond markets in period of heavy redemptions.